Allocation of captive blocks through auction will not do away with loot, because any captive mine represents undue benefit, allocated howsoever.

The only sensible reform in coal is to scrap the Coal Mines Nationalisation Act (CMNA), end administrative pricing of coal, allow in professional miners, and get all coal users to buy their coal at market prices for long-term supply contracts.

But it is plain wrong to believe that this undue benefit can be removed by holding auctions for captive mines in a manner that garners some immediate revenues for the government. This belief stems from poor understanding of how the business works.

Coal mining was nationalised in 1973. But the state monopoly was found to be incapable of supplying enough coal, although India has one of the world's largest reserves of coal, to meet the economy's needs. So, the Coal Mines Nationalisation Act was amended thrice over time to provide for allocation of captive mines to producers of cement, steel and power.

This is an institutional framework for distributing undue benefits. For the patronage of allocating captive coal mines, netas and babus have been demanding and getting bribes from industry over the years, at the Centre and in the states.

How does the government lose money in coal? After all, the state derives income from minerals principally in two ways: royalty and tax on profits. Whoever does the mining, the government will get these, so how will the government lose revenue?

State monopoly creates loss to the government in three different ways. The first is plain loot of coal from mines. Bribing someone operationally in charge of dispatches at a mine can allow someone who is entitled to lift one million tonnes to take away a whole lot more, the degree of moderation in loot being inversely proportional to the bribe paid.

Then again, the government loses potential corporate tax. Supposing there were no captive mines and professional miners sold coal to cement, steel and power producers. These miners would book profits and pay tax on these profits. These taxes stand forgone.

One might argue that this is illogical - after all, those who are allocated captive mines do pay tax on the profits they make from their end produce. So, why should there be any net loss?

Captive coal mines produce two kinds of inefficiency: in mining coal and in converting coal into cement, steel, power or whatever.

A professional, whole-time coal miner would certainly produce more coal at less cost compared with a captive miner. So, captive mining produces forgone potential profits in mining. But this is not all.

Shortage of coal biggest reason for loss to government

A steel producer benchmarks his produce against import prices, set by companies that have no captive iron ore or coal. Indian producers perform much lower value addition, therefore, in converting the inputs they get at subsidised rates into the final produce that their foreign producers sell at the same price without subsidy on their inputs.

The value addition transferred from mining to steelmaking by steel producers with captive mines, together with the value addition in steelmaking per se, would be lower than the total value addition, were coal mined by specialised miners and steel produced by competitive steel producers.

Finally, the largest source of loss to the government from state monopoly is the sheer shortage of coal. Some 50,000 mw of power generation capacity idles in power-starved India today, thanks to shortage of fuel, chiefly coal.

This translates into forgone production of enormous size, lost jobs and income, apart from losses for those who put up the power plants and, potentially, the banks that financed them. All the forgone income would have yielded revenues to the government, apart from improving lives.

Can captive coal mines be allocated through auctions in a manner that does away with such loss? Not in the least. The government is going ahead with some auctions, but these are completely flawed. If the auction's bidding parameter is upfront payment of money to the government, it would jack up the cost of coal.

How high a price would be acceptable to the bidder? This would vary depending on the end-use. The contribution of coal to final profits varies for cement, steel and power. You would need to conduct separate auctions for different segments, otherwise power producers, for whom coal is the only raw material and so is most valuable, would corner all the blocks.